Wednesday, February 15, 2012

Na na, hey hey, kiss Romney's prediction goodbye

Since many of my more conservative readers tip their caps to the Economist, let's look at that publication's response to Mitt Romney's reent op-ed in the Detroit News reiterating his criticism of the auto industry bailout. Here's Romney:

My view at the time — and I set it out plainly in an op-ed in the New York Times — was that "the American auto industry is vital to our national interest as an employer and as a hub for manufacturing." Instead of a bailout, I favored "managed bankruptcy" as the way forward.

Managed bankruptcy may sound like a death knell. But in fact, it is a way for a troubled company to restructure itself rapidly, entering and leaving the courtroom sometimes in weeks or months instead of years, and then returning to profitable operation.... (but) before the companies were allowed to enter and exit bankruptcy, the U.S. government swept in with an $85 billion sweetheart deal disguised as a rescue plan.... American taxpayers have been left on the hook for billions to benefit unions and the union bosses who contributed millions to Barack Obama's election campaign.... We should not be back on a road like the one that brought us Freddie Mac and the housing crisis. It is a road with endless hazards. It is not the American way of making cars.

(Romney's essay) rivals Cirque du Soleil in its display of contortions. Mr Romney seems loth to gush about the success of the bail-out, noting only the good news that "Chrysler and General Motors are still in business". He certainly doesn't mention that 2011 was the best year for America's carmakers since the financial crisis, with each of the big three turning a solid profit....But the course Mr Romney recommended in 2008 began with the government stepping back, and it is unlikely things would've turned out so well had this happened.

Free-marketeers that we are, The Economist agreed with Mr Romney at the time. But we later apologised for that position:

Had the government not stepped in, GM might have restructured under normal bankruptcy procedures, without putting public money at risk. (But) given the panic that gripped private purse-strings...it is more likely that GM would have been liquidated, sending a cascade of destruction through the supply chain on which its rivals, too, depended.

Even Ford, which avoided bankruptcy, feared the industry would collapse if GM went down. At the time that seemed like a real possibility. The credit markets were bone-dry, making the privately financed bankruptcy that Mr Romney favoured improbable. He conveniently ignores this bit of history in claiming to have been right all along...

Mr Romney must find a way to re-write history, lest he fall further behind Rick Santorum in his state of birth. Mr Santorum didn't support the auto bail-out either, but he evinces a genuine compassion for blue-collar workers. And he didn't pen an op-ed predicting--

If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye.

The doomsayers were wrong.... Mr Obama has been tough from the start. GM had to promise to slim down dramatically—cutting jobs, shuttering factories and shedding brands—to win its lifeline. ...But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends. On the contrary, his goal has been to restore both firms to health and then get out as quickly as possible. ... Straightforward bankruptcy is usually the most efficient way to allow floundering firms to restructure or fail. The state should step in only when a firm’s collapse poses a systemic risk. Propping up the financial system in 2008 clearly qualified. Saving GM was a harder call, but, with the benefit of hindsight, the right one. ...The lesson for American voters is that their president, for all his flaws, has no desire to own the commanding heights of industry. A gambler, yes. An interventionist, yes. A socialist, no.

Posted at 08:35:29 PM

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Screwing the bondholders is always a really good way to get a company back on its feet. And the feds are down big time in their equity investment in GM.

I know leftists are so eager to declare this a success story, but the taxpayers (and of course the bondholders whose contract was ripped apart) have lost BILLIONS in order to reward Obama's union pals. Why should we be surprised that GM was able to turn a profit when the government made GM's debt largely disappear and showered them with billions in taxpayer money? If you take debt service costs off of the income statement of most large companies, you'd see profitability. Nobody knows how this will play out, my guess would be that the moral hazard that has been established will cause in the same situation in the future and we'll be fed more doomsday scenarios and will see another bailout.

In addition, this sets the table for further government intervention down the line. All an administration has to do is deem a company as "systemic", a term that is subjective in nature. Any sleazy lawyer or political spin doctor can concoct a case that a firm is systemic. I imagine there will be a relationship between a firm being deemed systemic and the amount of campaign contributions the firm has provided.

As bad as GM's situation was in 2008 and 2009, they were still selling cars. That demand was not going to disappear and obviously they have many millions/billions of dollars in productive assets in the Detroit area. I'm not convinced that GM wouldn't have been able to reorganize, but if the worst case scenario came to fruition and they had to liquidate, these assets would be bought by another party and put to use.

And of course Romney changed his story, he is a poltician trying to win votes in Michigan. Spare me the indignation, Eric. The other day Barack Obama declared Jesus would want us to pay more taxes, is that not pandering?

Denis, as you undoubtedly know, they would have been treated as senior secured creditors. The way Obama shoved things through, they were treated as unsecured creditors and were subordinated to the unsecured pension plan holders.

Pan, the bondholders lent money to GM on the condition that they be secured creditors in the event of bankruptcy. GM was so risky that they wouldn't have lent the money without that protection. Obama, being above the law and all, came in and tore up the contracts and subordinated the creditors to his union friends and campaign contributors.

Of course the bondholders complained, but all they got from Obama was more divisive rich/poor language to try and delegitimize their case.

If you had lent money with the understanding you had secured status and then had Obama dismiss your contract to reward his friends, wouldn't you be upset? Well, I probably shouldn't pose that question to you because you seem to blindly follow Obama no matter what he does. If it came down to liquidation, GM had many productive assets that could've been turned into cash to pay the bondholders.

It's *not* a case where the bondholders would have *remotely* been made whole in a chapter 7 or 11, it's that the employees and retiress, with aggregate claims of (very) roughly the same size, got more than the bondholders, when they should have been (again, roughly--the EEs may have been entitled to some priority on some of their claims) pari passu.

Re Chris, sheesh yourself. It is common parlance to refer to bondholders as "secured" esp relative to unsecured creditors such as shareholders. You know what "pari passu" means, so you should have gotten my drift. Use "senior" if you wish.

Of course the bondholders would not have been made whole. But why were they treated differently, except that Obama was buying votes at their expense? Perhaps you can provide an explanation.

"It is common parlance to refer to bondholders as "secured" esp relative to unsecured creditors such as shareholders."

Well, it's just wrong. I'm all about the vernacular, when it isn't directly in conflict to the applicable terminology of the thing actually being discussed, as it is here.

1. There *are* such things as secured bonds. GM may have issued some secured bonds; if so, those are not the "bonds" widely discussed.
2. In bankruptcy, "secured" means something. It means that the holder of the secured claim would have rights in specific collateral.
3. "senior" means something, too, and would not apply to all of the bonds issued by GM. Wouldn't have much affect on bankruptcy priority tho.
4. Non-bankruptcy priority of claims *regualrly* gets mucked about in bankruptcy. Heck, *bankruptcy* priority of claims gets ignored/glossed over in bankruptcy not infrequently. It just rarely gets done so with the involvement of the POTUS.

As to why, a determination was made--quite possibly incorrectly--that in the absence of the POTUS-led cramdown, GM would have been forced to lquidate, and that that was bad for the country.

And, had GM failed, there would have been substantial socialization of the private pension costs thru PBGC, so perhaps a determination--quite possibly on the whole a bad decision--was made that GM's lenders should bear a substantial portion of the burden, rather than the public at large.

So, there are two reasonable explanations for why it was done that have *nothing* to do with "buying" the vote of any former, current or future GM employee.

Well, Chris, thanks for the education on bonds. Getting down to short strokes, we both understand the creditors were crammed down by the President and they got less than the union retirees got. Explanation for that? There were more retiree votes than bondholder votes. Do you seriously think there was any other? Why else make the BH's pick up part of the pensionees' tab?

Regarding what happened to the public at large, Treasury out a ton of dough as GM stock has fallen since the IPO, and the ex-car czar acknowledged last December that the Treasury's $19 bil that it gave GM pre-BK can be considered kaput also.

Here's a couple of useful reads for those who think this was a swell deal.

Note this part: "In addition, Rattner acknowledged in a recently published epilogue to his 2010 book, Overhaul, that about $19.4 billion that the government put into GM before the 2009 bankruptcy is "lost money."

It seems Mr. Computer ate my last comment, and I have to get back to work, so let me just say, in response to the link to the WSJ opinion piece that Chris posted:

1) It clearly states that the GM bondholders were unsecured, despite the strident assertions upthread.

2) The GM bondholder who wrote the piece is light on enumeration. His biggest beef seems to be that the bondholders got a smaller piece of GM collectively than the retirees, in proportion to their stake. It's unclear how or if this translates to a loss on the bonds.

Well, good MCN, if you look at the question in context--i.e., what would have been the cost to the taxpayers if tens of thousands of autoworkers had been thrown on the street--it seems to me the taxpayers came out way ahead.

Garry, I read that too (about Ford), plus looking at only the GM employees fails to take into account that supply chain, which apparently is much, much larger than most people think. And if those suppliers went under, where would people who already owned GM cars go for parts, and what would Ford do.

Boris--If I headed a think tank with economists on staff, I would be happy to do the math. Since I do this solely as a hobby, I can only suggest that, per Liz and Garry above, there are many associated costs, up and down the supply chain, that would have had a ripple effect and added to the ongoing economic catastrophe if GM and Chrysler had been allowed to go under.

Just humor me and tell everybody (instead of me telling you, which you will not trust)
1. How many people does GM employ? In the US?
2. The total sum of all the bailouts to GM combined, from TARP to stock ownership.

You can then try some sensitivity analysis, such as "what if the number of affected employees was twice that?" and tell me the cost per employee.

Maybe then you will begin to understand the magnitude of your illusions and ignorance.

ZORN REPLY -- yes, Pan, and pass along this critique to the ignorant editors of the Economist, and tell them they should only dream of having the insight Boris does.

P.S.
One hugely beneficial event for the U.S. auto industry was the devastating earthquake in Japan. That all thee automakers enjoyed in common, so ought to be much higher on the list of probable causes for the relative current strength.

Is that number right? Assuredly not. But it's probably in the ball park.

ZORN REPLY -- I imagine it's very, very hard to figure out how many jobs were saved by saving/propping up GM -- the ripple effects either way are probably quite significant and hard to measure.
It's facile to claim that another car maker would have moved in and started up again in those plants, or even to suggest those plants could have been sold or carved up and sold for much. A liquidation of GM might have -- probably would have -- devastated much of southeastern Michigan given the number of jobs at GM and the interdependence of the economy --- the guy who drives the truck to the bakery that makes the buns that sells to the restaurants where GM workers ate...that kind of thing.
Surely all of you who are, rightly, nervous about unemployment's overall metastatic effects on the economy and giddy about the benefits of "job creators" aren't looking through a narrow lens here, are you? You can't simultaneously argue that giving tax breaks to the rich trickles down to all sectors of the economy and lifts all boats, to mix my metaphors, while pretending that giving a big subsidy boost to a huge industry is all just money on the red side of the balance sheet while looking only at a few sunken boats?
I'm guessing if Romney wins the nomination, he'll lose Michigan in the fall because Michiganders quite rightly and fairly instinctively feel saved by the bailout, the misfortune of the bondholders notwithstanding.

Contrary to Rick's idea, I believe that had GM and Chrysler gone away, their assets in southeast Michigan would have stood idle, and the people who worked there would have been out of a job. The portion of demand filled by the two companies would have temporarily gone unfilled, but it's unlikely that another car company would come and take over the plants. They would do what the transplants have done; they'd locate in right-to-work states where costs are lower, and the Detroit area would be turning back to prairie even faster than it is now.

The supply chain problem is a real one. I was a GM employee for almost 34 years, until 2005. During that time, GM went from making almost everything that went into its cars to buying large portions of its components. Delphi, for instance, is an amalgamation of former GM parts divisions that was spun off and encouraged to go find business outside of GM. While they still do a lot of business with GM, and a GM disappearance would do them major damage, they supply other automakers, and non-automakers, as well. GM used to make most of its castings in Defiance, Ohio. No more; they buy them from others now.

So, just counting the GM employees is deceptive, as EZ points out. Many other people would also be affected, and some suppliers probably fatally, leaving other companies scrambling to source parts for their products, and lots of non-GM employees out of work.

As Eric said so eloquently above, allowing GM and Chrysler to go under would have devastated the Michigan economy, across not only those companies and their supply chains, but the many service and other industries that depend on them.

Costs to the taxpayer would include (but certainly not be limited to): autoworkers' pensions, unemployment, food stamps, school lunch subsidies, other social services, police and social services associated with economic stress and its results (alcohol and drug abuse, domestic violence), job retraining, and on and on. It's hard for me to believe the taxpayer would come out ahead in that scenario.

You keep asking for numbers. I'm sure that someone, somewhere, has studied this comprehensively and has everything measured and enumerated. I just don't feel like chasing after that information because your good opinion is frankly not that important to me. If this doesn't satisfy you, and I'm sure it won't, I'll just have to pick up the pieces and get on with my life.

Right, we don't know for sure how many more jobs would have been lost, but we also don't know for sure how many would have been picked up by other auto-makers (such as Ford) to fill the gap in supply. However, the simple exercise MCN went though -was in response to a claim that this left taxpayers better off by avoiding the payment of unemployment benefits (I wish those who claimed it went through it, as it turns out they were making essentially numerical claims without any knowledge of numbers) So you can play that number of potentially unemployed, I suggested doubling it for practice, and see how many years of average unemployment benefits that represents.

And @Zorn's "'m guessing if Romney wins the nomination, he'll lose Michigan in the fall because Michiganders quite rightly and fairly instinctively feel saved by the bailout"

Well, of course. That's what people mean when they say it was a political move to buy votes. A pretty old trick, take the money out of pockets of 100 million Pauls, in a way that no one knows for sure for how much they were hit, to buy the votes of 150 thousand Peters

I doubt your opinion is important to anyone, as you have no thought of your own and mostly just blurt things out without ever bothering with facts. But a great job of brown -nosing to Zorn. Still, I am sure even he knows that eloquence doesn't make the truth.

I am glad however that you unwittingly pretty much showed essence of this: a nationalization of the auto industry, even if it is not so on paper. When the government guarantees that it will not let those companies fail, it is a de facto nationalization.

@EZ: I'm not sure why my post suggesting a calculation method to Pan for him to, perhaps for the first time on record, actually answer a question, especially when I didn't raise any of the issues you mention, some of which literally come of out of left field.

But where I come from, badly run companies go bankrupt or out of business. Unless they have lots of unionized voters, this being the Obama Exception to Schumpeter's work on creative destruction.

But I am sympathetic to the damage that a closure of GM might have done to Michigan. It's just that living in a badly run state like Illinois (my family is still there), which historically pays far more in fed tax than it gets back, subsidizing another badly run state like Michigan rather sticks in my craw, especially the way Obama did it.

Here, I'd like to give you a opportunity to defend the way Obama ripped off the bondholders in order to favor the pensionees. Perhaps you have a better explanation than mine, which is that he in an utterly unprincipled fashion bought off a bunch of voters.

Finally, do you generally agree with the editorial sentiments expressed in the Economist? Or is this a case of cherry-picking:)?

--Re: "ZORN REPLY -- yes, Pan, and pass along this critique to the ignorant editors of the Economist, and tell them they should only dream of having the insight Boris does."

Sorry, I didn't notice that piece of counter-factual eloquence. The Economist editorial is on a narrow issue of the accuracy of Romney's prediction about the survival of the U.S. auto industry. No more no less. So try again, this time with something a little bit more factual and logical.

Boris, I'm with you on Cash for Clunkers. I saw an estimate that the program cost over $25,000 per marginal sale (for the economically illiterate, not you, Boris, "marginal sales" are sales that would not have occurred without the program). Its effect, like that of the homebuyer tax credit, was to steal sales from the future; after the program was over, sales tanked. The future always comes.

Further, it didn't go far enough. It destroyed perfectly good cars, and didn't get at the real clunkers. While the program was going on, I happened to be following a young black fellow who was driving a first-generation Chevy Lumina down I-55. It had body panels of several different colors, its right rear tire was a space-saver spare, and I could smell it. The program should have offered people like him a straight-up trade for their cars; bring in your car and your title and take your pick. That guy was most likely not in the market for a new car, but an opportunity to trade up could have been the best thing that had happened to him in a long time. The Feds missed a bet there; as in most things, they lack the imagination to take maximum advantage of the available value.

And that's the thing: surely the Feds, from the President down must have understood such a simple economic concept, yet they would never admit it. But for folks like Pan, whatever calculations the politicians and their technocrats made, as long as they are from the party that soothes their anxious souls, sprays Febreze over the stench of their fears, is the Word of God, not to be questions or analyzed.

You are right, I apologize. The same idea should have been expressed more calmly: politicians exploit our most primitive negative emotions to obscure even relatively accessible truth, and the vast majority falls for it.

Good, we agree that what presidents and congresses DO is spoend money to buy votes. Republicans and Democrats, they all take taxpayer money and spend it to prolong their power. And none of them (save Dr. Paul, perhaps, and Dr Coburn, perhaps) give two hoots about the fiscal future of the country.

So, why is it that anyone should care between two candidates for federal office? Just social issues?

But where I come from, badly run companies go bankrupt or out of business. Unless they have lots of unionized voters, this being the Obama Exception to Schumpeter's work on creative destruction.

Posted by: MCN | Thursday, February 16, 2012 at 09:42 PM

============================================================

Does this include the Wall Street bailout TARP program under President Bush in the fall of 2008? The one that saved Goldman Sachs, Wells Fargo, Chaser, Bank of America, etc.? Why was it okay to save non-union jobs in New York City but not okay to save union jobs in Detroit?

Late to the party but MCN and Boris have made a better case than I could anyway.

Just a few things to add. The following point may have been made above and, if so, I missed it, but the cost of the bailout should also factor in the moral hazard cost related to other big companies who will assume that they can make horrible mistakes and be bailed out by the government.

DaveB is exactly right that a liquidation of GM would have horrible ripple effects in Michigan and elsewhere in the rust belt but it's a fair question to ask whether businesses should be responsible for the risks of operating in states such as Michigan in the first place. Given the huge costs of moving, especially for manufacturers, I blame the politicians (of course) and note that Govs. Snyder, Kasich, and Walker have a huge mess to clean up. Good luck, fellas.

Chris is correct that only a few GOP leaders truly can make the case that they care about the fiscal health of this country based on their records. Paul and Coburn are the examples I would have used too. When evaluating other candidates, unfortunately we have to decide who is better incrementally rather than being assured that our preferred candidate is doing the right thing. That's why no matter who we choose for the nomination, we have to make sure that Ron Paul's message gets through and has an influence on the party. Coburn should be a VP candidate.

BC, and why would that line of reasoning be valid anyway? If something is a bad idea, it is bad regardless of who puts it forward and ALSO regardless of whether an observer is consistent in identifying all the instances of it (which in this case, as MCN is telling, you way off target anyway with respect to his, Greg J's and my views).

About "Change of Subject."

"Change of Subject" by Chicago Tribune op-ed columnist Eric Zorn contains observations, reports, tips, referrals and tirades, though not necessarily in that order. Links will tend to expire, so seize the day. For an archive of Zorn's latest Tribune columns click here. An explanation of the title of this blog is here. If you have other questions, suggestions or comments, send e-mail to ericzorn at gmail.com.
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Contributing editor Jessica Reynolds is a 2012 graduate of Loyola University Chicago and is the coordinator of the Tribune's editorial board. She can be reached at jreynolds at tribune.com.